(FORTUNE Magazine) – When Wall Streeters said things were heating up this summer, they weren't necessarily talking about the weather. With torrid action in commodity prices fueling inflation fears, interest rates have been climbing despite a gradual slowing in economic growth. Rates could rise higher still -- but investors who hold out for the peak may miss it. By September, rates may have turned south for the winter. While some economists believe short rates will continue to climb as the Fed tightens the money supply to slow inflation, many see long rates edging up ) only slightly. Bulls say the time to jump on the bond wagon is now. ''I think yields of over 9% on 30-year Treasuries are extraordinarily attractive, especially for an investor with a long time horizon,'' says economist Edward Yardeni of Prudential-Bache. ''Holding out to see if yields will hit 10% is playing it much too cute.'' Believers in bonds predict rates will fall later this year once investors realize inflation fears have been exaggerated. Some market watchers even foresee a rising bond market -- and decreasing yields -- well into the next decade. ''We are still in a period of declining interest rates that began in 1981,'' says Lynn Birdsong, managing director in charge of fixed income at Scudder Stevens & Clark. As baby-boomers age, they will spend less and save more, he argues. Those savings, coupled with a stable dollar that attracts overseas investors, should push yields on long bonds back down to 7% by the 1990s, figures Birdsong. Other bond fans believe that when the prolonged economic expansion runs out of gas, demand for credit will dry up and rates will drop. YIELDS ON MOST TYPES of fixed-income securities have risen over the past six months. On a relative basis supersafe Treasuries look best, since strong demand for other types of bonds has reduced the amount of extra yield they offer. You can buy Treasuries from local Federal Reserve branches, brokers, or through a mutual fund. Vanguard's U.S. Treasury Portfolio, which owns bonds with maturities averaging around 25 years, yields about 9%. Investors who do not expect rates to drop soon may want to consider ten-year Treasuries, since rates on intermediates already have moved up more than rates on long bonds. Peter Niculescu, a Salomon Brothers analyst, recommends mortgage-backed securities despite the narrowing of their spreads over Treasuries. The collateral behind these securities is pools of mortgages guaranteed by such federal agencies as the Government National Mortgage Association, or Ginnie Mae. Says he: ''We prefer this sector largely because we think the supply of new issues will be limited. We see housing starts falling from an annual rate of 1.1 million units in April to 980,000 by fall.'' If so, that would translate into price appreciation for investors who buy the bonds now. The best way for the individual investor to participate is by purchasing shares in a fund such as the $2 billion GNMA Trust offered by Federated Securities of Pittsburgh. The fund was recently yielding 8.7%. Warning: Mortgage-backed securities, which are fully taxable, can be treacherous. If rates drop dramatically, homeowners will prepay their mortgages, which eats away at the total return. These securities are best suited to investors looking for income. Tax-free municipal bonds have lost some luster this summer. Still, an investor in the 28% tax bracket would have to find a taxable investment yielding over 10.56% to beat a muni at the recent yield of 7.6%. Robert Zubak manages the Insured Tax Free Income Fund, which recently was yielding 6.5%. His Chicago brokerage house, Van Kampen Merritt, believes muni prices could climb further, since tax reform reduced their supply and income taxes are likely to rise. Zubak recommends New York State Power Authority 7 7/8% bonds due in 2013 and Washington D.C. General Obligation 8% due in 2008. The yield advantage junk bonds had over Treasuries is shrinking. A Salomon Brothers index of intermediate-term junk that yielded 5.2 percentage points more than comparable Treasuries shortly after the crash has slipped to a 3.9- point spread. Though some bond analysts still love junk, others point to the recent bankruptcy filing by Revco DS, which defaulted on $703 million of junk paper issued by Salomon. During a downturn high-risk bonds could perform poorly. And if rates drop precipitously, many issues will be called. Prudent investors should place only a small part of their portfolios in junk, using highly diversified, proven funds like Kemper High Yield, which was up 11% in total return for the year through July 28. High-grade corporate bonds are usually inappropriate for the individual investor since they are fully taxable. But rates on 30-year industrials are near 10.2%. Niculescu of Salomon suggests looking into high-quality, widely traded issues. Bonds fitting the bill include Chevron's 9 3/8% due in 2016, yielding 10.1%, and New York Telephone's 8 7/8% due in 2018, yielding 10%. Make sure to check call provisions before you buy. Another approach: spreading your dollars around. A study by William Landes, chief of government bonds at Putnam Management Co. in Boston, shows that a portfolio combining different kinds of bonds produces returns nearly equal to Treasuries with less price risk. As he explains, ''Treasuries do well when the economy is weak and the dollar is rising; high-yield bonds are attractive when the economy is strong; and foreign bonds are the place to be when the dollar < is slipping. A mixture is the best way to go.'' Investors can create a blend themselves with bonds or bond funds, or they can buy shares of Putnam's Master Income Trust, which does the job for them.

CHART: YIELDS TODAY VS. SIX MONTHS AGO

BOND 7/29/88 1/29/88

30-year Treasuries 9.22 8.43

10-year Treasuries 9.11 8.26

10-year mortgage-backed 10.25 9.62

Long-term junk 13.11 13.40

30-year industrials 10.20 9.25

30-year municipals 7.60 7.50

CREDIT: SALOMON BROTHERS CAPTION: Want something to tuck away? Beware of high-yielding junk. Just ask the bond-holders of Revco, a drugstore chain that recently went bankrupt. The top pick these days is good old U.S. Treasuries. DESCRIPTION: Comparison of yields on 30-year and 10-year treasury bonds, mortgage-backed bonds, junk bonds, 30-year industrial bonds, 30-year municipal bonds on July 29, 1988 vs. January 29, 1988.